44. Karen, an accrual basis taxpayer, sold goods in December 2014 for $20,000. The customer was unable to pay cash. So the customer gave Karen a note for $20,000 that was payable in April 2015. The note bore interest at the Federal rate. The fair market value of the note at the end of 2014 was $18,000. Karen collected $20,500 from the customer in April 2014, $20,000 principal plus $500 interest. Under the accrual method, Karen must recognize income of:

Question

44.	Karen, an accrual basis taxpayer, sold goods in December 2014 for $20,000. The customer was unable to pay cash. So the customer gave Karen a note for $20,000 that was payable in April 2015. The note bore interest at the Federal rate. The fair market value of the note at the end of 2014 was $18,000. Karen collected $20,500 from the customer in April 2014, $20,000 principal plus $500 interest. Under the accrual method, Karen must recognize income of:

Quizplus · Accepted Answer

Karen,an accrual basis taxpayer,must recognize as income in 2014 the amount she has the right to receive ($20,000).The interest is not subject to the original issue discount rules because the note was for less than a year.Therefore,the $500 of interest is included in gross income in 2015.

44 Karen, an Accrual Basis Taxpayer, Sold Goods in December 2014